Google: Strong Quarter, Still Expensive

One of Google's earliest self-conceptions has certainly been borne out: It's no ordinary company.  Ordinary companies just don't grow this way.  In fact, it's probably safe to say that no company has ever grown so big and so dominant so fast (If anyone knows of one, do tell).  In Year 8, Google is about to smash through the $14 billion revenue-run-rate barrier.  Annualized free cash flow has now cleared $2.5 billion.

This said, Google-the-company is different from Google-the-stock.  You can be in awe of one and ho-hum on the other.  Even with a flat stock price and extraordinary growth over the past year, Google-the-company has yet to grow into its valuation.

At $490, Google's market cap is just north of $150 billion.  This is 60X run-rate free cash flow of $2.5 billion and 50X a generous $3 billion FCF estimate for 2007.  If the global economy stays strong and the company can haul back on its CAPEX in future years, perhaps FCF could hit $4 billion or $4.5 billion in 2008.  At that level, the FCF multiple starts to look more comfortable (33X-38X), but it would still be far from cheap.  And banking on $4-$4.5 billion in FCF in 2008 at this point requires some serious faith.   

On the positive side, one point that jumped out in the release was the new language concerning future CAPEX: Although Q1's CAPEX was a startling $597 million, the comment about future 2007 spending is that it will continue to be "significant."  This in contrast to previous releases in which the company said the growth rate of CAPEX would exceed that of revenue.  Despite Q1's enormous number, therefore, I take this as another indication that CAPEX should start to flatten, which will cause free cash flow to accelerate.

 

Comments

[Robert]

paraphrasing Chris Mathews on Hardball....

Henry, tell me something I do not know.

[Royal]

GOOG stated exactly how much option related expenses were in their quarterly announcement. So that all the reporters could pick up on it. Which they did.

On the other hand, I haven't found in any of the press reports what YHOO's option related expenses were. So none of the reporters picked up on it.

Like one has something to hide and the other doesn't.

Really, though, I'm not interested in all the option related expenses... I know options are important to tech companies... I'm only interested in YHOO CEO Terry Semel's...

...so, please, Henry, a question for your Wall Street analyst side: Would YHOO have made the earnings consensus if Semel didn't receive such big option grants?

(I know YHOO missed rev number, too... ultimately, I'm just wondering if it wouldn't have been such a blood bath the last two days if they would have made one of their numbers.)

[Sliced Bread]

GOOGLE IS THE GREATEST COMPANY IN THE HISTORY OF MANKIND!!!!!!!!!!!!!!

THE STOCK PRICE SHALL NEVER DECLINE!!!!!!!

EVERY TV STATION SHALL BE GOOGLE TV!!!!!!

EVERY NEWSPAPER AND RADIO STATION WILL USE GOOGLE ADVERTISTING!!!!!!!!!

JOHN MEYNARD KEYNES SCREW YOU!!!!!!!!!!!!! YOUR THEORIES ARE NO LONGER RELAVENT!!!!!!!!!!!

I SEE GOOGLE GOING TO 1300 BY 2008 AND BEING THE LARGEST MARKET CAP COMPANY IN THE WORLD!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

3000 by 2009!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[Victor]

It's hard to fathom how this is not a $600 stock. Can anyone name any company that's growing this fast with this low a p/e?

[Henry Blodget]

I don't think P/E is the right metric to look at here, at least not "pro forma" P/E. The "stock-based compensation" that the pro forma folks ignore is an operating expense--and should be treated as such. Also the income statement does not yet capture the impact of the company's immense CAPEX.

All in, I think Free-Cash-Flow is a better metric. And while the stock's not outrageously priced on an FCF basis, it's also not cheap--even if you go out to 2008.

[Diablo]

Duh !

Of course it is not cheap and why should a company with this track record and performance be ? If it were, it simply wouldn't make any sense.

The interesting thing,as Victor says, is why the stock is not more expensive given the growth and quality of execution. And because it isn't I'd say it makes a reasonable 5-10 year investment.

[BB]

The market cap here is a key metric. you can look at eps and go 16x40 = undervalued etc. megacap companies cannot be valued like growth stocks no matter what. also, google does not produce any content which is important. tv streaming over the internet may not give google a dime. you would go to cbs.com and watch a show and they get the ad money

[echotoall]

common Henry, if we were to look at FCF for yahoo we would find a single digit stock?

it is about time the premium found in YHOO gets shifted to GOOG. traditional 'rule of thumb' valuation models give YHOO the gross premium over GOOG. Google has proved time after time to have earned a sick premium, yet they do not get it. The valuations should be reversed.

I know there is the whole re-accelaration issue w/Yahoo, but all i have been seeing (for the past year from YHOO) were promises of re-accelaration of revenue... but never deliver. but since terry said to wait just ONE MORE quarter, I guess YHOO longs should wait ONE MORE quarter for that re-accelaration... as you also pointed out. (YHOO longs should hope too much market share is not lost before the monetary gains can be seen.)

[a suggestion]

Hi Mr Blodget: Since this blog is kind of stalled, and you are clearly infatuated with google, here's a small project to stir the pot:

1) Open an adwords account yourself, and see first-hand the lack of transparency in google's reporting to their advertisers "we charged you for 3 clicks today on such-and-so keyword". Don't forget to publish your ads on the content network (the default)!

2) Google "adsense scams", etc., and ask, given the prevailence of email spam, if this is happening on a massive scale, especially since these so-called scams are not illegal (Worst that can happen is your adsense account gets closed).

3) Note that many advertisers use a third party and have *even less* transparency on how their ad dollars are spent than a first-hand adwords user.

4) Read how despite common wisdom that "it's easy to track ROI" learn how that's kind of not true, except in very specific direct-response cases.

5) See if you can figure out for yourself how google can grow its revenue so quickly, while keeping its employees flush in lava lamps.

6) ... Oh, I don't know. It's your blog, after all! But do get back to us if you have something interesting to report! :)

If you don't want to do this, atleast tell us if your definition of FCF -- is it the conventional one (operating cash flow minus capex) or one of the many variations used out there? Then I can atleast pretend I know what you are writing about (if I don't fall asleep first).

If you already told us your definition in one of your increasingly redundant earlier posts, my apologies...

thanks!

[P-]

Google the Company. A Great Company (From 'The Google Is GOD! series)

First Innovator's 3rd rule of advantages

What is your Displacement rate(rivals)?

>>... no company has ever grown so big and so dominant so fast (If anyone knows of one, do tell).<<

At least the metrics are holding true to form.

____________________
The World's Greatest Detetctive!
An Odyssey. The Revolution!
http://finance.groups.yahoo.com/group/invest_mavin/

[Jim]

Henry,

Just like to point out that Yahoo! and Google have different definitions of FCF. Yahoo!'s FCF includes excess tax benefits from stock-based compensation, while Google's does not. Using Google's clean definition (which is the right way and consistent with other companies like eBay), Yahoo!'s FCF was only $660M in FY06 after subtracting $597M tax benefits. Yahoo!'s own guidance on FCF in FY07 is $1.2B to $1.4M. Subtracting the tax benefit, the most one could expect Y!'s true FCF would be around $0.9B to $1B in FY07. Yahoo! is now trading at 37 times of that. With Google growing 6X faster than Yahoo! and gaining market share month over month, it is hard to justify giving Google and Yahoo! the same FCF multiple. Don't you agree?

[Sum Dum Guy]

Lao Tzu wrote in the Ta Te Ching:

The sharper the knife
the easier it is to dull.

[Victor]

Henry, Bill Miller cites P/E as a metric for valuing Google:
http://www.kiplinger.com/columns/picks/archive/2007/pick0420.htm

One big Google fan is Legg Mason's Bill Miller, perhaps America's best-known fund manager. "There is no company in the market that we can find with a faster top-line growth rate, a higher profit margin, a dominant position like Google enjoys but with a lower price-earnings multiple," said Miller, in an interview with Kiplinger's April 19. Miller notes that Google has a lower P/E ratio (26, based on the $18.92 per share analysts expect the company to earn in 2008) than Starbucks (SBUX) but is growing twice as fast as the ubiquitous coffee company. He puts it in a league with Wal-Mart (WMT), Microsoft (MSFT), Cisco Systems (CSCO) and Dell Computer (DELL) at the start of their meteoric stock-price ascents. Those companies also sported lofty P/E ratios, but Miller says they were cheap in relation to their future successes.

[Sufiy]

Google Earnings: EPS is falling and Growth is slowing

Mass media and Google would like you to belive that everything is just going fine, growth is strong and valuation of a Search Engine is justified at the market cap of 152 billion dollars. After quick play with Google's own numbers you will be woundering why is Eric Schmidt is "... ecstatic about our financial results this past quarter" particularly if "...I would like to remind everybody as I have each year at this time, that we are about to enter our seasonally slower summer growth period, and make sure you factor that in when thinking about how our business will grow." So what is so "ecstatic"? Maybe EPS at 3.18 which is below EPS of 3.29 in Q4 2006. It is decline in EPS of 3% and Google is facing its seasonally slowest quaters ahead. I found it rather disturbing...

http://sufiy.blogspot.com/2007/04/google-earnings-eps-is-falling-and.html

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